Comptroller Kevin Lembo, while reporting a projected $242.4-million surplus
for Fiscal Year 2019, urged sustained financial discipline in building the
state’s Budget Reserve Fund to account for the possibility of slowing economic
growth, uncertainty at the federal level and volatility in the financial
markets.

In a letter to Gov. Dannel P. Malloy, Lembo said he is in general agreement
with the state Office of Policy and Management’s (OPM) latest budget outlook,
which accounts for higher-than-anticipated spending in the state’s adjudicated
claims account, which is used to pay negotiated settlements, including SEBAC v.
Rowland claims.

Lembo said that job gains and wage growth are good signs
for Connecticut’s economic outlook, but he also urged caution due to factors
beyond the state’s control.

“Connecticut cannot control financial markets
or federal shutdowns – but it can control its future by building its budget
reserves and staying financially disciplined,” Lembo said. “Growing stock market
turbulence and political uncertainty on the federal level may have an impact on
consumer confidence as the government shutdown enters its second week with no
end in sight. Therefore, it is imperative that Connecticut continue to build a
strong balance in the Budget Reserve Fund to protect against any future
downturn.”

Through November 2018, combined collections of estimated and
final income tax payments were 13.9 percent higher than the same period a year
ago. However, due to recent steep drops in the stock market, these revenue
categories will need to be monitored carefully in thecoming months, Lembo said.

The state’s new statutory revenue volatility cap, which Lembo advocated for, now
requires that revenues above a certain threshold be transferred to the Budget
Reserve Fund (BRF). Here are the latest projections related to the BRF:


For FY 2019, the cap is $3.19 billion for estimated and final income tax
payments and revenue from the newly enacted Pass—Through Entity tax. If current
projections are realized, a $648-million volatility transfer would be made to
the BRF. The present balance of the BRF is $1.18 billion. Adding the
estimated $648-million volatility transfer and my office’s projection surplus of
$242.4-million surplus would bring the BRF to just under $2.1 billion, or about
10.9 percent of General Fund expenditures.

“This would certainly represent a
significant improvement over the recent past,” Lembo said, noting again that 15
percent would be an ideal target. “Connecticut’s overall budget results are
ultimately dependent upon the performance of the national and state economies,”
Lembo said.

Lembo pointed to the latest economic indicators from federal and
state Departments of Labor (DOL) and other sources that show:

Employment

 After a
strong performance in FY 2018, preliminary results for FY 2019 through November
2018 show withholding receipts grew by 8.7 percent compared with the
corresponding period in the prior fiscal year. This positive development likely
reflects more robust job gains in recent months combined with some preliminary
indications of accelerating wage growth. For comparison purposes, the
November consensus revenue forecast from the Office of Policy and Management
(OPM) and Office of Fiscal Analysis (OFA) is based on withholding receipts
growing by approximately 4.1 percent over FY 2018 realized amounts. Withholding
receipts to date, therefore, are coming in ahead of the budget targets for FY
2019. However, this early in the fiscal year, the Office of the State
Comptroller agrees a conservative approach is warranted for this forecast.
On Dec. 20, 2018 Connecticut DOL reported the preliminary Connecticut nonfarm
job estimates for November 2018 from the business payroll survey administered by
the U.S. Bureau of Labor Statistics (BLS). DOL’s Labor Situation report showed
the state lost 500 net jobs in November, to a level of 1,702,900, seasonally
adjusted. However, October’s originally-released job growth of 1,500 was revised
up by 1,500 to a gain of 3,000 jobs over the month. The sectors that lost
the most jobs in the month of November 2018 were education & health services
(-600) and professional & business services (-500), while manufacturing and
trade, transportation & utilities lost 400 jobs each. Sectors that gained
employment in November included construction (+700 jobs), other services (+400)
and financial activities (+300). Over the year, DOL reported that
nonagricultural employment in the state grew by 23,000 jobs on a
seasonally-adjusted basis. Connecticut has now recovered 91.3 percent (108,700
payroll job additions) of the 119,100 seasonally adjusted jobs lost inthe
Great Recession (3/08-2/10). The job recovery is into its 105th month and the
state needs an additional 10,400 jobs to reach an overall employment expansion.
 Connecticut's unemployment rate stood at 4.1 percent in November, down
one-tenth of a point from October 2018 and down four-tenths of point from a year
ago when it was 4.5 percent. Nationally, the unemployment rate was 3.7 percent
in November 2018, unchanged from October. The chart below shows a comparison of
the Connecticut and U.S. unemployment rates over the past three calendar years
 DOL reports that November 2018 seasonally adjusted average weekly initial
unemployment claims for first-time filers in Connecticut grew by 491 claimants
(16.0%) to 3,555 from October 2018 and were lower by 113 claims (-3.1%) from the
November 2017 level of 3,668. Among the major job sectors listed below,
seven experienced gains, and three experienced losses in November 2018 versus
November 2017 levels. Construction, leisure & hospitality and professional &
business services were the fastest growing sectors in the state’s labor market
on a percentage basis. The government and transportation & public utilities
sectors experienced the largest losses.

Wage and Salary Income
November 2018 average hourly earnings at $32.26, not seasonally adjusted, were
up $1.31 or 4.2%, from the November 2017 estimate. The resultant average private
sector weekly pay amounted to $1,087.16, up $34.86 or 3.3% higher than a year
ago. DOL warns that due to fluctuating sample responses, private sector earnings
and hours estimates can be volatile from month-to-month. The 12-month
percent change in the Consumer Price Index for All Urban Consumers (CPI-U, U.S.
City Average, not seasonally adjusted) in November 2018 was 2.2%. On Dec.
20, 2018 the Bureau of Economic Analysis reported that Connecticut’s personal
income grew by a 4.1 percent annual rate between the second and third quarters
of 2018. Based on this result, Connecticut ranked 20th in the nation for
third-quarter income growth. This growth rate was just above the national
average, but slightly slower than the New England region’s average rate of 4.2
percent. Personal income growth across all states ranged from 6.2 percent in
Nevada and Washington State to 2.1 percent in Missouri.

Housing

 Berkshire Hathaway
HomeServices reported results for the Connecticut housing market for November
2018 compared with November 2017. Sales of single family homes fell 7.30
percent, while the median sale price rose 7.82 percent. New listings fell by
4.72 percent in Connecticut and the median list price increased by 8.00 percent
to $264,150 from a year ago. Average days on the market decreased 15.22 percent
in November 2018 compared to the same month in the previous year (78 days on
average, down from 92 days). Finally, the list to sell price rose slightly to
97.0 percent, compared with 96.8 percent a year ago. The table below
contains more detailed data for the Connecticut housing market. For the
U.S. overall, the National Association of Realtors (NAR) reported mixed market
conditions for November 2018. Existing-home sales increased in November for the
second consecutive month and three of four major U.S. regions saw gains in sales
activity. Total existing-home sales (defined as completed transactions that
include single-family homes, townhomes, condominiums and co-ops) increased 1.9
percent from October to a seasonally adjusted rate of 5.32 million in November.
However, sales are down 7.0 percent from a year ago (5.72 million in November
2017). According to NAR, the median existing-home price for all housing
types in November was $257,700, up 4.2 percent from November 2017 ($247,200).
November’s price increase marks the 81st straight month of year-over-year gains.
In addition, total housing inventory at the end of November decreased to 1.74
million, down from 1.85 million existing homes available for sale in October.
However, this represents an increase from 1.67 million a year ago. Unsold
inventory is at a 3.9-month supply at the current sales pace, down from 4.3
last month and up from 3.5 months a year ago. NAR noted that inventory is
plentiful on the upper-end of the scale, but a mismatch exists between supply
and demand at more affordable prices.

Population On Dec. 19, 2018 the
U.S. Bureau of the Census released its population estimates for July 1, 2018.
Connecticut’s population declined slightly between 2017 and 2018 and now stands
at 3,572,665. This represents a decrease of 0.03% from the prior year’s
estimate. Over the longer term, Connecticut was one of only three states to lose
population since the 2010 Census. Connecticut’s lack of population growth
remains a constraint to the state’s potential for economic expansion.

Stock
Market

 The stock market has experienced significant volatility in 2018,
especially in the last three months of the year. A number of issues caused
concerns for investors, including worries about inflation and rising interest
rates; fears about an escalating trade war as the United States announced
tariffs on products like steel and aluminumand threatened to impose trade
sanctions on China and other countries; apprehensions about rising bond yields
that may cause investors to move from stocks to lower risk bonds; and general
concerns that stocks may be over-valued and due for a correction. By early
October 2018, investors appeared to have shaken off their concerns and the DOW
had climbed back and reached a new high, closing at 26,828.39 on Oct. 3, 2018.
 Since then volatility has returned in force and continued through December
2018. Investors have experienced renewed fears of inflation, rising interest
rates and slowing economic growth. In addition, ongoing concerns about rising
trade tensions with China have increased uncertainty for the market.
Political uncertainty in the U.S. is adding to investor’s worries in December.
Two examples include the possibility of a prolonged federal government shut down
and administration criticism of Federal Reserve monetary policy after a recent
rate hike. As of this writing, all major stock indices are well into negative
territory for the year and they are experiencing one of the worst monthly
performances since the Great Depression. This is the first time that all three
major indices are down for the full year since the 2008 financial crisis.
Stock market activity for the past year is illustrated on the three charts that
follow:DOWNASDAQS&P 500 INDEX The performance of the stock
market has a significant impact on the State of Connecticut’s revenues. In a
typical year, estimated and final income tax payments account for approximately
35 to 40 percent of total state income tax receipts, but can be an extremely
volatile revenue source. For example, both estimated and final payments had
negative growth rates in Fiscal Years 2016 and 2017. In contrast, both
categories experienced strong positive growth in FY 2018, partly due to changes
in federal tax provisions. FY 2018 year-end results showed estimatedpayments
growing by 76 percent fiscal year-to-date compared with the prior year,
representing an increase of over $1.2 billion. Final payments grew by $239
million or 15.3 percent over the same period a year ago. The full impact of
a separate federal tax change, specifically related to limits on State and Local
Tax (SALT) deductions, has not yet been fully felt by Connecticut residents. The
implications of the $10,000 limit on SALT deductions will become more apparent
when state residents begin filing their 2018 federal tax returns in the next few
months. It is likely many Connecticut taxpayers will face a higher federal tax
burden. Preliminary indications for the first five months of FY 2019 show
that estimated payments are running ahead of budget targets. Through November
2018, combined collections of estimated and final payments were 13.9 percent
higher than the same period a year ago. However, due to the reemergence of
volatility and recent drops in the stock market, these revenue categories will
need to be monitored closely in the coming months. It should also be noted that
the rapid growth in estimated payments during FY 2018 began in December and
January, largely due to one-time events. Next month’s results will likely show
FY 2019 year-to-date collections falling behind FY 2018’s pace.

Consumer
Spending Consumer spending is the main engine of the U.S. economy,
accounting for more than two-thirds of total economic output. The Commerce
Department reported that U.S. advance retail sales grew in November 2018,
increasing 0.2 percent to $513.5 billion. In addition, the growth in retail
sales between September and October 2018 was revised upward to 1.1 percent (from
the previously reported 0.8 percent). In November 2018, receipts at
furniture stores grew by 1.2 percent over October 2018 levels, while sales at
electronics and appliance stores increased 1.4 percent. Online and mail-order
retail sales surged 2.3 percent, the largest gain in a year. Auto sales gained a
modest 0.2 percent in November 2018 after advancing 1.5 percent the month
before. Sales at gasoline stations dropped by 2.3 percent in November 2018,
largely due to falling oil process. Consumers also spent less at restaurants and
bars (-0.5 percent), building supply stores (-0.3 percent) and clothing stores
(-0.2 percent). Core retail sales rose 0.9 percent in November 2018 after
increasing 0.7 percent in October. This category excludes sales of automobiles,
gasoline, building materials and food services. Analysts believe core retail
sales correspond most closely with the consumer spending component of gross
domestic product. In comparison to a year ago, the Commerce Department
reported that retail sales were 4.0 percent above November 2017 levels. In
addition, gas station receipts were up 8.2 percent and non-store retail sales
were up 10.8 percent from a year ago.

Preliminary Results for the Holiday
Shopping Season Preliminary results for the holiday shopping season look
promising based on a Dec. 26, 2018 release from Mastercard SpendingPulse. The
report noted retail sales in the U.S. from Nov. 1, 2018 through Christmas Eve
were up 5.1 percent to more than $850 billion, the strongest growth in six
years. Mastercard SpendingPulse provides analysis on overall retail spending
trends across all payment types, including cash and check. Key findings from the
report indicate that despite weather challenges, this was a positive holiday
season for retail overall. However, the results were different among the various
retail categories:  Online shopping saw gains of 19.1 percent compared to 2017.
 Total apparel had a strong season with growth of 7.9 percent compared to 2017,
recording the best growth rate since 2010.  Home improvement spending continued
to surge across the U.S. with spending during the holiday season up 9.0 percent.
 Department stores finished the season with a 1.3 percent decline from 2017.
This follows two years with growth below 2 percent, some of which can be
attributed to store closings. However, the online sales growth for department
stores indicated a more positive story, with growth of 10.2 percent.
Electronics and appliances were down 0.7 percent, while the home furniture and
furnishings category grew 2.3 percent.

Consumer Debt and Savings Rates
According to the Federal Reserve Bank of New York, aggregate household debt
balances rose to another new peak in the third quarter of 2018. Household debt
has now grown in 17 consecutive quarters. As of Sept. 30, 2018, overall debt –
including mortgages, auto loans, student loans and credit card debt – hit a
record of $13.51 trillion. This represented an increase of $219 billion (1.6%)
from the second quarter of 2018. In addition, overall household debt is now
21.2% above the post-financial-crisis trough (low point) reached during the
second quarter of 2013. The report titled “Quarterly Report on Household
Debt and Credit” noted mortgage balances – the largest component of household
debt – rose by $141 billion duringthe third quarter, to $9.1 trillion.
Balances on home equity lines of credit (HELOC), continuing their downward
trend, declined by $10 billion to $422 billion, the lowest level seen in 14
years. In addition, auto loans increased by $27 billion, credit card balances
grew by $15 billion and student loan balances rose by $37 billion in the third
quarter. The Federal Reserve reported that aggregate delinquency rates
worsened in the third quarter of 2018. As of September 30th, 4.7 percent of
outstanding debt was in some stage of delinquency. This represented an increase
from 4.5 percent in the second quarter, the largest jump in 7 years. Of the $638
billion of debt that is delinquent, $415 billion is considered seriously
delinquent (at least 90 days late). This increase was primarily due to growth in
student loan balances falling into delinquency. In the third quarter of 2018,
11.5 percent of aggregate student debt was 90+ days delinquent or in default, a
substantial increase from the prior quarter. The flow into 90+ day delinquency
for credit card balances has been rising for the last year while the flow into
90+ day delinquency for auto loan balances has been slowly trending upward since
2012. In its most recent household debt report, the Federal Reserve of New
York also began including a new series of charts showing debt and repayment
levels by the age of the borrower. The report noted older borrowers now hold a
larger share of total outstanding debt balances, while the shares held by
younger borrowers have contracted and shifted toward auto loans and student
loans. In its Dec. 21, 2018 release, the Bureau of Economic Analysis (BEA)
reported the personal-saving rate was 6.0 percent in November, down from
October’s revised rate of 6.2 percent. The personal savings rate is defined as
personal saving as a percentage of disposable personal income. The graph
below provides a long-term view of the U.S. savings rate from the beginning of
1959 through November 2018. As can be seen, there is a general downward trend
over the period. It should be noted that the U.S. Personal Saving Rate does not
include capital gains from the sale of land or financial assets in its estimate
of personal income. This effectively excludes capital gains – an important
source of income for some. Despite the overall improvement in the nation’s
economy, income inequality continues to widen as wage growth remains modest. A
number of economists see the decline in the personal savings rate as a red flag
as consumers borrow more to fuel spending. This will leave little margin for
error in case of a downturn, especially for families who are living from
paycheck to paycheck.

Consumer Confidence The U.S. consumer confidence
index (CCI) is published by the Conference Board. The CCI looks at U.S.
consumer’s views of current economic conditions and their expectations for the
next six months. The index is closely watched by economists because consumer
spending accounts nearly 70 percent of U.S. economic activity. The
Conference Board reported that the Consumer Confidence Index declined in
December 2018. The Index now stands at 128.1, down from 136.4 in November 2018.
This decrease in consumer confidence follows a modest decline in November and
represents the lowest level since July 2018. The Conference Board’s Dec.
27, 2018 release noted consumer expectations regarding job prospects and
business conditions weakened in December, but suggest that the economy will
continue expanding at a solid pace in the short-term. However, back-to-back
declines in consumer expectations reflect an increasing concern that the pace of
economic growth will begin moderating in the first half of 2019.

Business and
Economic Growth According to a Dec. 21, 2018 report from the Bureau of
Economic Analysis, U.S. Real Gross Domestic Product grew at an annual rate of
3.4 percent in the third quarter of 2018, which represented a deceleration from
the strong 4.2 percent growth in the second quarter. This was the third estimate
for the quarter and it was revised down from 3.5 percent based on more complete
source data. First-quarterGDP growth was 2.2 percent. Strong consumer
and government spending helped drive third quarter GDP results. BEA reported the
increase in real GDP in the third quarter reflected increases in consumer
spending, inventory investment, government spending, and business investment.
Notable offsets were decreases in exports and housing investment. Imports, which
are treated as a subtraction in the calculation of GDP, increased during the
quarter. The decline in residential investment may be related to rising
interest rates, which has hurt the housing sector. In addition, some economists
warned that the significant increase in inventory in the third quarter may be
partly due to companies stocking up on goods and parts from China before prices
rise in January when additional tariffs are scheduled to go into effect. In
the same release, BEA reported U.S. corporate profits grew by 3.5 percent in the
third quarter of 2018 after increasing 3.0 percent in the second. On a
year-over-year basis, corporate profits grew 10.3 percent from the third quarter
of 2017, the fastest increase since 2012. In a Nov. 14, 2018 report, the
Bureau of Economic Analysis (BEA) released Real Gross Domestic Product (GDP)
results by state for the second quarter of 2018. Connecticut experienced a
seasonally adjusted annual growth rate of 3.1 percent, which ranked 43rd in the
nation overall. This growth rate was slower than both the national average of
4.2 percent and the New England regional average of 3.7 percent. BEA data
indicated the sectors that contributed most to Connecticut’s growth in the
second quarter of 2018 were real estate and rental & leasing (+0.74%),
information (0.70%) professional, technical & scientific services (+0.66%), and
durable goods manufacturing (+0.41%). Third quarter GDP results by state for the
third quarter of 2018 will be released on Jan. 29, 2019.

Durable Goods
According to a Dec. 21, 2018 report by the U.S. Department of Commerce, new
orders for durable goods increased a modest $1.9 billion or 0.8 percent to
$250.8 billion in November 2018. This increase followed a significant 4.3
percent decrease in October. Transportation equipment, specifically orders
for military aircraft, drove the increase in November. Transportation equipment
was up $2.5 billion or 2.9 percent to $87.0 billion from the previous month.
Excluding transportation equipment, orders fell 0.3 percent. Orders for
core capital goods, a category that serves as a proxy for business investment,
were down 0.6 percent in November. This category includes non-defense capital
goods excluding aircraft and the decline was the third in four months. The
recent weakness in business investment has raised concerns among analysts that
this trend could weigh on growth in the fourth quarter. In addition, as CNBC
noted, last year’s corporate tax cuts were supposed to result in a surge in
business spending on equipment. The first half of the year showed promise on
this front. However, the drop in business investment since the summer suggests
this may not have been a longer-term trend.